The Global Debt Crisis
Yesterday was a very bad day in global government bond markets
The global debt crisis that’s unfolding has three ingredients. First, global debt levels are at very high levels, the result of massive COVID fiscal stimulus. Second, budget deficits all over the place remain exceptionally wide, which means markets have to absorb a lot of net new debt issuance all the time. Third, there’s idiosyncratic trouble spots that periodically blow up, causing contagion to the rest of the world.
Yesterday was a very bad day in global bond markets and it was all about the last point. Japan’s likely new prime minister has a reputation as a fiscal dove, causing long-term Japanese yields to spike in remarkable fashion. And the French prime minister resigned after less than a month on the job, a symptom of the fiscal impasse France is facing. French long-term yields also spiked. The global debt crisis that’s unfolding will proceed in fits and starts. Yesterday is took another big step forward.
I last showed this panel of charts in a post I wrote almost a month ago. Each chart shows the 10-year government bond yield in blue and the 10y20y forward yield in red. The latter is what markets price for the 10-year yield 20 years from now, which I back out from 20- and 30-year government bond yields. Longer-term yields have risen in dramatic fashion everywhere, which means markets are demanding higher and higher risk premia to hold long-term debt. This spike in yields is the flip side to the dramatic - and worrying - rise in gold prices that’s been playing out this year. It’s clear markets are in a desperate search for safety from debt monetization and currency debasement.
Japan’s 10y20y yield yesterday jumped to 4.52 percent, up from 4.26 percent on Friday. That’s a massive move for longer-term yields, which was accompanied by a sharp fall in the Yen. Rising yields with a falling currency are tell-tale signs of mounting fiscal stress. For perspective, Japan’s simple 10-year yield was 1.69 percent yesterday. The risk premium for Japan’s longer-term trajectory is scary.
France’s 10y20y forward yield yesterday jumped to 5.03 percent, up from 4.96 percent on Friday. Its simple 10-year yield is 3.57 percent. A massive risk premium is building, the result of a deeply divided electorate and a President who’s trying to hang on to keep the extreme right out of power.
The global debt crisis will unfold in fits and starts. It will advance when idiosyncratic trouble spots blow up, causing contagion to vulnerable bond markets elsewhere. This is what happened yesterday and there will be - inevitably - more days like this ahead.
Italy would seem to be bucking the trend. How can this be explained?
Robin why do you think the US long end hasn’t recently been as impacted as UK, France, Germany etc? As it was a few months ago- the narrative of fiscal sustainability still exists in US, together with the additional challenge of central bank independence. Regardless of whether economy is weakening and fed cuts are justified, these challenges still exist.